The Fall Of A Giant

These days most investors, me included, would say that high-quality blue-chip companies should make up the core of your investment portfolio. We are blessed with a market where a range of great blue-chip businesses are priced incredibly cheaply.

Throw in some impressively high yields and it looks like you can't go wrong. We would expect a portfolio of blue-chip high-yielders to produce both dividend income and capital growth over the next decade and more.

But I would warn that it isn't always as simple as that. Giants can rise, but they can also fall. Take the example of Sony (NYSE: SNE.US).

An illustrious history

Sony was founded in the wake of World War II by Masaru Ibuka and Akio Morita, from an electronics shop in a bomb-damaged department store building in Tokyo. Over the 60s, 70s and 80s, the company developed into one of Japan's industrial champions, playing a key role in the Japanese economic miracle of the time.

Back in the 1970s, the Japanese were seen as making cheap and inferior copies of Western products. Sony was perhaps the one firm, above all others, that transformed that reputation.

By the late 80s, Sony products were being sold all over the world. They had a reputation for being at the cutting edge of technology, and their quality was impeccable. If you wanted to buy the best quality television, hi-fi or other electronic product, you had to choose Sony.

The Apple of its day

The scientists and engineers at the firm came up with innovation after innovation. In 1979 they invented the Walkman. In 1983 Sony launched, with Phillips, the compact disc, thus transforming the music industry. In the same year they introduced 3.5" floppy discs, which became the standard for personal computers. In 1994 the first PlayStation was launched, which sold 100 million units in 10 years.

It's hard to imagine it now, but back in those days Sony was producing hit after hit. It could do no wrong -- it was, quite simply, the Apple (NASDAQ: AAPL.US) of its day. People marvelled at Akio Morita's vision in the same way that people talk about the vision of Steve Jobs today.

Sony's rise coincided with Japan's rise, and also with the incredible bull market in the Japanese stock market. As Japan boomed, Sony's share price went through the roof.

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The first mistake

By 1989 the total value of Japanese companies represented an astonishing 42% of global market capitalisation. Sony had become hugely valuable, and thus hugely powerful. It used its power to buy CBS Records in 1988 and Columbia Pictures in 1989. It did so in the pursuit of 'convergence', linking film, music and digital electronics via the internet.

This pursuit turned out to be misguided, and was Sony's first strategic mistake. But, nonetheless, the business continued to be successful through the 90s. By 2000 Sony was valued at $100 billion, and remained one of the world's leading companies.

A turning point

But if I had to point to one day that marked the beginning of Sony's decline as the worldwide leader in technology, it would be 23 October 2001. On that day, Steve Jobs, sporting his trademark turtleneck jumper and jeans, took to the stage to unveil the next revolution in music: the iPod.

In one fell swoop, Apple stole from Sony the mantle of 'the world's greatest technology innovator'. Since that day, the boys from Cupertino have never looked back, and have been innovating like there's no tomorrow. At the same time, Sony seems to have lost the knack of producing stunning, game-changing products. It is now just another big, bureaucratic conglomerate.

In contrast to the great success of the first two generations of the PlayStation, the PlayStation 3 has never made any money for Sony. The business invented the Blu-ray just as it was being made obsolete by the internet. It completely missed the boom in music players, and has been slow to develop smartphones.

Handle with care

In 12 years, Apple's share price has increased 100-fold, while Sony's has collapsed to a tenth of what it was. Anyone who bought into Sony during its heyday would have suffered badly. But who, in 2000, could have guessed that the Japanese company would go through such travails? Not me, that's for sure.

The fact is that not all blue chips are as safe as you might imagine. Why? Because, quite simply, things change: fashions come and go, new technologies emerge, a visionary CEO may be followed by a duffer.

And change is at its fastest in disruptive industries such as technology. Now I understand why Warren Buffett was so reluctant to invest in tech. Don't get me wrong, tech shares can be amazing investments, but their success or failure is hard to predict, and -- because of that -- they need to be handled with great care.

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There is merit in the 'fashion brand' comment in regard to Apple. Great as they are today, their largest strategic weakness is their arrogance and their locked down approach to their operating systems. History suggests that companies taking that line can fall, hard and fast, and there is something that makes me very nervous about them as an investor from the position today of course, ten years ago a different matter. Now IBM is a different beast and one of the most under-valued tech stocks out there today and ten years from now it will all seem so obvious..... In my personal subjective opinion.

Has ANY consumer electrical company ever maintained market leadership over the long term? No.

I don't really like the sector, as if anyone builds a better phone, the likes of Apple could lose substantial market share in less than a year. More mundane businesses selling burgers, tobacco or beer are unlikely to see such sudden changes in the competitive position.I think Peter Lynch wrote something along these lines in one of his books.

Yes but you want to be picking up the sleeping giants and then hope they wake up before the fail. Long term investments in seemingly small companies are the ones that have historically paid off for lucky investors with an eye for the future.

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